Thought Leadership

Brokers suck, but we have to be one

FR8Star wants to create a new category for marketplaces focused on transparency

There’s definitely a mystique about the trucking industry that has been illustrated in popular culture, from truckers portrayed as urban cowboys back in the 50’s, to humanoid robots in the 80’s, to abrasive antagonists today. As someone who knows the trucking industry well, the antagonists are definitely not the truckers.

If there’s one adversary in this industry, it’s the broker that pimps the truck driver to shippers who need a load delivered by truck. Simply stated, many brokers can’t be trusted. Their incentives are misaligned with truckers and the shippers, and an unfortunate lack of transparency results in bad behavior.

Now allow me to offer a mea culpa: FR8Star is a broker.

We didn’t set out to be one when we started the company three years ago. But as we tried to change an industry, we found that we didn’t have a choice. It is simply where we fit in if we were to create technological efficiencies in an industry that’s been largely ignored by the proverbial software that’s eating the world.

To be sure, we’re a broker only in a regulatory sense. In spirit and actual behavior we are a marketplace - a platform that replaces brokers and the very opaque ecosystem in which they exist. We prefer to be in a class of our own, if only to rid ourselves of the very tainted and unscrupulous reputation brokers currently have. Here’s how we may be able to accomplish that.

The problem with brokers

Let’s start with defining what a broker actually is and what they do. The Department of Transportation says that those arranging transportation between shippers and carriers, need to be licensed and authorized brokers.

As regulations are designed to do, they give peace of mind to both shippers and carriers that the broker they’re working with is legitimate and has a level of fiscal responsibility.

At least in theory. Unfortunately, the barriers to entry are laughably low. There is no training requirement, no rigorous classes or tests to take, no industry pledges on ethical practices and fiduciary responsibilities. Therein is the essence of a major problem since the laws enable an environment in which the broker is incentivized to establish an obscure wall between the carrier and shipper.

Let’s give a hypothetical situation: you’re a shipper asking a typical broker, “I need to move my container from Los Angeles to San Francisco.” that broker, would quote you a price of $2,000. You are buying transportation services from the broker and your knowledge of what happens next stops right there. The broker then turns around and finds a carrier that can do it for less. While brokers typically average 20% margin in these transactions, they try for more and in some cases may charge the shipper up to twice what they pay the carrier.

Shippers are not aware of who the carrier is until they’re booked and they’re delivering the goods. Knowing beforehand would allow the shipper to not only know how much the carrier is being paid, they could circumvent the broker and go directly to the carrier. To ensure this doesn’t happen, brokers typically require carriers to sign a contract prohibiting them from back soliciting, meaning the carrier can’t call a shipper directly. And the broker contracts with shippers and carriers separately, giving them a tremendous amount of knowledge and leverage over both sides.

For frequent shippers and big carriers, this isn’t a problem, since they have established relationships with one another to handle the consistent business and they don’t typically use brokers. For an infrequent shipper, that ships sporadically and also to various places, they have no choice but to use a broker.

Creating a marketplace category

When we started, we did not want to be a broker. Given that brokers are held in such low regard by shippers and carriers, we wanted to draw a clear line between us and them. We’d tell our clients: “There’s a way that brokers do business, and we’re not that. We’re a marketplace.”

With no regulatory framework for marketplaces, however, there are limits to what we could do. For instance, only brokers or carriers can get insurance. Technically, we don’t need to offer insurance since we’re just connecting shippers and carriers, but we felt it was essential to provide it in order to increase the protections for our shippers. Carriers also wanted assurances from us that they’d be paid. A broker has to post a $75,000 bond for liability; if they hire a carrier and don’t pay them, the carrier can get paid from the bond. Without a brokerage license we couldn’t post a broker bond.

While neither of those two thing are necessary to have a marketplace function, they are highly desirable, both to make the shipper more comfortable on the insurance side, and the carrier more comfortable on the bond side. To get both, you have to be a registered federal entity, and for that there is only one choice: a freight broker.

So we registered as a broker. But this came with a downside: our customers, particularly the carriers, assumed we’d behave like a traditional broker. This perception of them is so deep-rooted and unshakable, I believe it warrants having a marketplace becoming a new legal and regulated entity that can have access to these forms of security for the carrier and shipper without the stigma and more importantly without the perverse incentives that drive the bad behavior.

It seems brokers aren’t compelled to change their reputation. The highly fragmented broker community lacks a good forcing mechanism that instills trust. The concept of a marketplace has a fundamentally different dynamic because a marketplace has a reputation and a brand. A marketplace is one entity vs 12,000 disparate brokers. Due to marketplace network effects, one bad act ripples through and potentially causes reputational damage. A marketplace therefore has an overwhelming incentive to create transparency and treat its customers and suppliers (shippers and carriers) with integrity and fairness.

As a marketplace, we’re increasing transparency by having two-sided ratings, where carriers and shippers rate each other. We’re awarding loads based on reputation, so the better the carriers get more business, and we are 100% transparent about the pricing. Both sides see the prices and know what all parties are making. Creating full transparency for both sides encourages good and punishes bad behavior, leading to a market that functions better for everyone involved.

Changing regulations

Current regulation props up the status quo broker model, putting a restraint on the emergence of the marketplace model. Given the superior customer experience of marketplaces, I believe that we need to change transportation regulations to level the playing field between brokers and marketplaces.

How does this play out? My preference is that regulations change so that transparency would be required on the part of brokers. One simple change could be that every contract that a broker enters into with a shipper and a carrier should have the amount paid by the shipper to the broker and the amount paid by the broker to the carrier. That alone would do away with a lot of bad behavior by forcing more fairness and eliminating the games brokers play to try to convince the shipper of a higher price and hide complexity from the carrier to get a lower cost. A public registry of complaints - Better Business Bureau for brokers, if you will - would create visibility on bad behavior by brokers and, frankly, on carriers too and would do a lot to improve service levels and quality in the industry.

Sadly, I don’t believe the government would get involved and enforce any price transparency, nor do I think the industry would allow it. Brokers are well-represented by the Transportation Intermediaries Association (TIA) and so have significant lobbying power. On the other hand, shippers and the small carriers that work with brokers are a fragmented and dispersed population with much less ability to coordinate a focused lobbying effort.

That leaves me with the only alternative: to advocate for creating a second class of operator -- the freight marketplace. This would mean establishing governing rules for companies operating marketplaces in transportation, including the requirement to be federally licensed in order to create the regulatory basis to support insurance underwriting and posting of a bond. Such regulation would impose additional rules on marketplaces to the benefit of carriers and shippers.

As a completely new category of business, there isn’t yet any advocacy group to take this up to Capitol Hill. Hence, it’s on our roadmap to champion this cause once we establish ourselves as the leader in our part of the market.

Our intent, over the next 12 months, is to lobby the Department of Transportation to create a category for freight marketplaces that is distinct from freight brokerage. We’re not the only ones. There are a dozen startups in this space, many of them focusing on different parts of the transportation industry, but all of them having that same objective of creating a transparent marketplace, bringing buyers and sellers together that result in positive network effects.

Just as marketplace disruptors like Uber and Airbnb are here to stay, in trucking, the freight marketplace is here to stay as well. But unlike Uber and AirBnB that have run afoul of local and state regulators by charging far ahead of the regulatory framework, I believe that in our space we can productively work with government to the benefits of our customers and the market in general.

So what does this mean for the future of the trucking industry? I fully expect the marketplace model to take a substantial portion, maybe 50 percent, of the market share away from traditional brokers. The larger players, companies like CH Robinson, will likely see an evolution in their model, but they’re big and entrenched enough to survive the shift.

The small brokers, however, will have to consolidate and/or be displaced altogether by the marketplace wave. Growing, trusted brands that treat their sellers and buyers transparently and fairly will be category-killers compared to the cowboy-broker approach. And yes this means that brokers will be put out of their jobs, but as is always the case with technological progress,the marketplace disruption create growth opportunity for other jobs. Uber created more jobs for drivers. Airbnb supports a massive ecosystem of newly-formed mini-hotel moguls.

But we’ll never know what that future is like if we constrain ourselves to the current and existing models. We know we can’t force the issue until we have leverage. Until then, our mission and goal is to become big enough to make this change a reality.